President Donald Trump plans to sign an executive order on Friday afternoon directing his Treasury Secretary to review tax regulations issued over the last year, aimed at eliminating those that “add undue complexity” and “exceed statutory authority.” Trump has pitched the order as a way to reduce excessive burdens on business and taxpayers alike. The White House said it will focus on those that “impose an undue financial burden on American taxpayers,” but it’s business that seems most poised to reap the benefits.
That’s because the most likely candidates for getting rolled back are regulations issued by the Obama administration aimed at reducing corporate tax avoidance.
Over the last few years, large American corporations have engaged in so-called “tax inversions”: buying or merging with a company located in a country with lower tax rates and then shifting headquarters to that new country. That allows a corporation to reap the benefits of the lower tax regime while for all other intents and purposes continuing its American business as normal. More than half of such deals completed over the last three decades have occurred since the start of the Great Recession.
Companies contend that this is just proof that the U.S. corporate tax rate is too high. Yet very few that have completed these deals were actually paying the 35 percent on-paper rate.
But tax inversions are one way companies stash trillions of dollars overseas, shielding the money from American taxes. The country has lost an estimated $30 to $90 billion in tax revenue thanks to inversions.
To crack down on these types of deals, the Obama administration issued a series of regulations meant to make tax inversion deals much less attractive. In 2014, the IRS and Treasury removed loopholes in a complex set of maneuvers that inverted companies would use to bring some of the money earned in their overseas headquarters and subsidiaries back into the U.S. without paying American taxes. The agencies also more strictly enforced requirements that allow such inversion deals to go through in the first place.
Then after revelations in the Panama Papers of widespread tax avoidance, the administration issued another set of rules last year that went after “serial inverters,” or companies that are made up of multiple inversion deals. The new rules chipped away at their tax benefits and the technical moves companies made to shift money between foreign headquarters and U.S. subsidiaries without paying American taxes. President Obama argued at the time that companies founded in this country and developed with the aid of U.S. patents, research funding, and infrastructure that then shift headquarters to avoid U.S. taxes are basically robbing the country of needed revenue to invest in the very things that helped them grow.
That move effectively killed the largest-ever proposed inversion deal between U.S. drug giant Pfizer and Ireland-based Allergan.
The last round of anti-inversion rules are likely to be the first on Treasury Secretary Steven Mnuchin’s radar as he conducts the review Trump is about to mandate. Given that Congress didn’t take action on its own, Obama’s rules were issued by the Treasury Department. Mnuchin will now be tasked by Trump with reviewing tax regulations issued by his own agency over the last year.